Melbourne IT finds 'opportunity' in AAPT data breach

Melbourne IT is busy securing servers after customer AAPT was breached by Anonymous, the company's CEO, Theo Hnarakis, said in a conference call about its first-half 2012 results.

Despite the data breach and other setbacks related to credit card fraud and losing Microsoft as a customer, Melbourne IT reported results flat with the same period last year, and expects growth in the second half.

The company reported a 2.5 per cent year-over-year increase in revenue to $89.9 million in the first half of 2012. It also saw a 4 per cent increase in earnings before interest and tax (EBIT), ending the first half with $7.3 million. Net profit after tax for the first half increased 18 per cent year-on-year to $5.8 million, it said.

“Out of adversity ... opportunity arises,” Hnarakis said of the AAPT data breach. “Certainly we have been working with customers where we believe there might have been a vulnerability to upscale the solution they have.” Melbourne IT has “not lost one customer” as a result of the AAPT data breach, he said, and instead, the breach has increased customer demand for bolstering security. Melbourne IT is rolling out new security services, including tools to defend against phishing and distributed denial of service attacks, he said.

The company has “cooperated with all the authorities investigating” the AAPT data breach, and is “working closely with AAPT and other customers to make sure we don’t see a repeat of that incident,” Hnarakis said in the call. The company has “invited security specialists to forensically review our procedures and our own infrastructure to ensure there [are] no other potential weaknesses in the system.

“We were in some ways an unintended victim of this process,” Hnarakis said. “The intention of Anonymous was to prove the vulnerability of the data sitting on the AAPT server.” The attack hit three out of 4000 servers at Melbourne IT, and the servers were at least nine years old and operated (Adobe) ColdFusion, “which had a vulnerability that was not detected by anybody,” he said.

The small business division faced “quite a few challenges,” but should recover in the second half, Hnarakis said. Revenue for the division dropped 8 per cent year-over-year to $42.6 million and EBIT tanked 27 per cent to $5.9 million. “We started the year reasonably solidly and then in February and March we were attacked by a credit card scam out of Asia” that “clogged up our Web sales where we were being smashed by these various fraudulent transactions.”

Immediately following that mishap, the company's largest customer, Microsoft, “made an announcement to their customers that they were going to withdraw from domain names ... and customers had to migrate from Office Live to Office 365,” he said. “That created almost a panic move by most of the Microsoft customers.” When they couldn’t reach Microsoft support, they contacted Melbourne IT, resulting in a 10-times increase in call volumes, he said. “That jammed up our customer service lines” and e-business sales lines, he said. “Instead of selling, we were basically trying to save Microsoft’s bacon.”

The loss of Microsoft as a customer was “horrendous” to Melbourne IT, but the company has "a significant opportunity because something like 25 per cent of those customers transferred onto Melbourne IT’s books,” Hnarakis said. The company hopes to retain those customers and upsell them to additional services, he said.

Growth in Melbourne IT’s digital brand and enterprise services offset the “disappointing” small business results, said Hnarakis. “Digital brand services without question led the way and continue to reinforce our belief that this is and will be the growth engine for Melbourne IT for years to come.”

Performing particularly well was the company’s .brand application service, he said. Melbourne IT submitted 146 applications for new global top level domains, he said. Of the 146, 110 customers “committed to five-year registry contracts,” he said. “That will give us a pretty substantial lift in revenue from mid-2013 when we expect these names to go live.”

However, the “.brand” initiative took salespeople from “traditional revenue services” like brand protection and corporate domain management, Hnarakis said. Those should “be stronger in the second half because we won’t have the distraction of .brand,” he said.

Corporate overhead was up due to restructuring and advisory costs related to taxes, but they should fall to “normal levels” in the second half, Hnarakis said. Melbourne IT received a “fairly substantial tax benefit for R&D rebate in the first half,” and expects “benefits to continue to accrue for R&D rebates right through the second half of this year and also throughout next year as well,” he said.

“There continues to be a lot of M&A activity and consolidation activity” in the Web services industry, particular outside of Australia, Hnarakis noted. He highlighted recent proposed acquisitions by Endurance of HostGator and Intuit and Thomson Reuter’s agreement to buy MarkMonitor. “There is certainly the larger more serious players out there getting interested in this segment of the market.”

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